The “Piketty Bubble” Is More Than Hot Air

When does an interesting intellectual development turn into a fad, devoid of any real content? In Thursday’s Financial Times, the columnist Robert Shrimsley presents an amusing taxonomy of what he calls “the Piketty bubble—a social and economic phenomenon that arises when everyone who considers themselves to be anybody feels the need to talk about a new book by French economist Thomas Piketty.”

As one of the first people to write a lengthy review of “Capital in the Twenty-first Century,” as well as a quick guide, in charts, to the story, I may have played a small part in initiating the Piketty phenomenon, which has now extended well beyond what anybody, the author and his publisher included, could have expected. For weeks now, the dense, seven-hundred-page tome has been at or near the top of the Amazon best-seller list. At one point, as orders hugely exceeded the initial print run from Harvard University Press, it sold out online. The digital version was still available for download. But Shrimsley notes that the print copy is especially prized, “as even those who know they will never read it want it on their bookcase.”

Articles about Piketty have proliferated like spring flowers. At one point, it looked like the Times had set up a new vertical devoted to the man. And it’s not just an American thing. Just yesterday, I received a text from my brother in England, who is not a New Yorker subscriber. It said, “Watching Newsnight”—the BBC version of “Nightline”—“I assume you have read the Piketty book Capital in the Twenty-first Century. Is it nonsense?”

Evidently, we are reaching what Shrimsley, in defining the various stages of the bubble, calls stage three: “backlash,” in which critics question Piketty’s credibility and some people write off the whole thing as media hype. In this stage, Shrimsley writes, Piketty’s “credentials as a French intellectual are tainted by rumors he has never ridden a motorcycle or attended a soiree with Vanessa Paradis. Conservatives dispute Prof Piketty’s claims on inequality, arguing that it cannot be that bad since the poor still have access to running water.” Eventually, the FT wag predicts, we will get to stage nine, “Relocation”: “People move Prof Piketty’s book from the living room to the lavatory, where it sits on a shelf sandwiched between Stephen Hawking’s A Brief History of Time and Francis Fukuyama’s The End of History.”

Piketty, who seems to be a level-headed fellow, would probably chuckle at that one along with everybody else. In our media-addled world, there’s always a thing, or person, of the moment, from Flight 370, to Piketty, to Donald Sterling. And, indeed, there are sound economic models that explain why this should be so: when people respond to signals provided by others, as they do online, there is an inevitable tendency towards conformity and faddism.

Clearly, there’s some of that going on here. But as with all bubbles and fads, it is important to distinguish between the social meta-phenomenon and the underlying object of discussion. In this case, that is Piketty’s analysis of contemporary capitalism, which, despite numerous critiques—from the left as well as the right—stands on its own merits. When you get right down to it, “Capital In the Twenty-first Century” is proving so successful because it illuminates one of the great issues of our time, rising inequality, and provides a simple but novel explanation for it—one with alarming implications for the future.

At some point, I’ll get into details of the Piketty critiques, which are still pouring forth. Briefly, though, I haven’t yet seen anything that detracts from his two main points, the first of which is an empirical one: in terms of income and wealth, many western societies, particularly the United States, are exhibiting levels of inequality not seen since the Gilded Age.

Of course, the trend of rising inequality was already well known. But Piketty (and his research co-authors, who include Emmanuel Saez and Anthony Atkinson) have elucidated and extended it in important ways, particularly by shifting attention from generalized, abstract measures of inequality, such as the Gini coefficient, to simple and salient measures, such as the share of income and wealth going to the top one per cent. The Piketty-Saez “U-shaped” graph, which shows inequality falling and rising across the past one hundred years, has rightly become an iconic image.

Piketty’s second key contribution was more theoretical. He pointed to a tendency—not a rigid law—for inequality to rise whenever the rate of return on capital is greater than the growth rate of the economy. This is simply a product of compound interest. Wealth, if it isn’t spent, grows at the market rate of return (“r”). Wages tend to grow in line with the economy (“g”). When the rate of return exceeds the growth rate—when “r” > “g”—and wealth is concentrated in few hands, as it is almost everywhere, the income of the rich rises faster than the income of everybody else. Inequality goes up.

Once you see this written out, it seems obvious. But as Robert Solow, the M.I.T. economist, pointed out in an illuminating review of Piketty’s book in the New Republic, this is something that most economists hadn’t noticed before. Or, if they had noticed it, they hadn’t made much of it. Now, many economists and non-economists are discussing it at length—and that’s Piketty’s doing.

The long-run impact of “Capital in The Twenty-first Century” remains to be determined, of course. But I would be very surprised if it isn’t more substantial than the legacy of “The End of History.” Fukuyama was addressing an abstract question about whether liberal democracy had emerged as a universal ideal. Piketty is addressing something more concrete and pressing: the question of “Who gets what?”

Inside economics, he has helped shift the focus of attention, bringing issues of capital and distribution back to the fore, which is where they belong. To be sure, this development was already underway at places like the World Bank. But Piketty has given it a big push, and that’s all for the good. In the political world, he’s re-energized the debate about how to tackle rising inequality, extending it from issues like wage stagnation and C.E.O. pay to the broader question of wealth distribution.

We can already see how the dividing lines will be drawn. Many liberals and progressives will embrace Piketty’s calls for more redistribution through the tax system. Conservatives who have their heads in the sand will question whether rising inequality is a real problem. More realistic conservatives will call for policies that enable the non-rich to accumulate more of their own capital, either directly, through expanded individual retirement and savings accounts, or indirectly, by, for example, setting up sovereign wealth funds on the Norwegian model.

This is a worthwhile debate to have. (My own view is that we might well have to try all of the above, and some other things, too.) But, however it plays out, Piketty and his book won’t be soon forgotten. The “Piketty bubble” contains a lot more than hot air.